Critical Illness Insurance: What It Is and Whether Employees Need It

Posted by Deerfield Advisors Insurance Agency on November 20, 2015

Written by: The Deerfield Team

Simply having health insurance does not guarantee that an emergency health situation won’t cripple an employee’s finances. A critical illness can cost an employee an average of $35,500, mostly in the form of lost wages.¹

In terms of U.S. individuals that file for bankruptcy each year, 60% involve medical illness issues, and over 75% were insured by traditional health insurance when the illness began.² Traditional health insurance is important but financial gaps still exist because of the co-insurance & deductible constraints embedded in these policies. Securing coverage through critical illness insurance is one way to fill those gaps. Its popularity is rising among employers and employees, but many still lack information about its purpose, benefits, and costs. In this article under title“Critical Illness Insurance“ we’ll explore the important features of this type of coverage.

CI Insurance: An Overview

A South African cardiac surgeon introduced critical illness insurance in the 1980s, but it did not catch on in the U.S. until the late 1990s. Since then the voluntary offering has become almost mainstream. As of 2014, CI insurance sales exceeded $391 million, surpassing cancer insurance. The industry’s growth in the last ten years has been especially dramatic.

The majority of plans offer a lump sum payment between $5,000 and $30,000 (some offer up to $1 million) when the insured is diagnosed with a covered condition. Policies are usually portable and the payouts are only taxed if employers pay part of the premium. The insured has full control over how to spend the payout, which isn’t tracked. Uses may include covering anything from experimental treatments and transportation to mortgage payments.

In recent years, CI plans have become more sophisticated. Some offer multiple payouts over several years rather than terminating the policy at the first payout. If the insured suffers a stroke and cancer a decade apart, they would benefit from the plan twice.

Educating Employees on CI Insurance

About a third of midsize and large businesses offer CI insurance. Most of the 30% of employers offering to partially fund those benefits make partial funding voluntary.³ Average participation in CI insurance correlates with participation in other voluntary benefits.

While the popularity of CI insurance is clearly on the rise, employers must often work hard to justify the value of their offerings as healthcare costs rise faster than inflation.⁴ Many people mistakenly assume that medical insurance will cover all the costs that come with critical illness. Of the 28% of full-time employees who have even heard of CI, many confuse it with other insurance products.

Unless employers explain this often-misunderstood, relatively new insurance product to employees, who are paying a higher percentage of their healthcare costs than ever before, fewer employees will opt in. Does someone with disability, life, and medical insurance really need it? The truth is, it depends.

Who Needs CI Insurance?

Almost 50% of American households do not have enough money saved to cover a major medical condition.⁵ In such cases, having critical illness insurance premiums automatically deducted each pay period from their salary could turn out to be the difference between bankruptcy and financial health. Individuals who are sole providers, recently paid off deep debts, or earn too little to save easily may also benefit from enrollment in a CI plan.

On the other hand, individuals with disciplined saving habits or disability coverage that replaces 60-70% of their salary may not need CI. A combination of a flexible spending account or health savings account to cover medical costs with an emergency fund to cover nonmedical costs can suffice to pay for critical illness costs. Opting for this more complicated alternative to CI insurance gives individuals the option to use these savings even if they don’t fall sick.

In this complex and quickly-evolving healthcare landscape, it’s more important for both employees and employers to stay informed. Critical illness insurance is becoming popular because it fills an important gap in insurance offerings that leaves many families and individuals in serious debt during an already traumatic time. Employers should consider offering voluntary CI insurance to employees and, more importantly, educate themselves and employees alike about both its benefits and costs.